Thanks to the Tax Cuts and Jobs Act of 2017 (which was signed into law on December 22, 2017), and more specifically the new Section 199A (which is a part of that Act); owners of pass-through business entities may be able to substantially reduce their income tax burden.
The IRS has now issued proposed regulations, which provide guidance to determine the eligibility and the amount of any potential Section 199A deduction. For example, many taxpayers will be limited by certain income limits ($315,000 for returns filed as “married filing jointly” or $157,500 for other filers). Other taxpayers may be limited by the type of service their business provides.
Some of the questions we must consider concerning eligibility are:
- Who can take the deduction?
- How do S Corp., partnerships or LLCs handle the deduction?
- Is the taxpayer’s business considered a “qualified trade or business” (a “QTB”)?
- What income may be classified as “qualified business income” (“QBI”)?
- How is the QBI deduction computed?
- Is the taxpayer’s business considered a “specified service trade or business” (“SSTB”), for which the QBI deduction may be limited or phased out?
- Is the taxpayer’s taxable income (from all sources) above certain income thresholds, which may cause additional limitations on QBI deduction (based on wages paid or depreciable assets)?
Certain real estate investment trust (“REIT”) investors, as well as real estate developers (even those with as little as one rental property) may qualify for the deduction. Additionally, excluded businesses such as accounting or law firms, financial services firms, healthcare providers and certain other SSTB’s may still be able to qualify for the deduction pursuant to special provisions found in the new regulations recently issued by the IRS. Interestingly, architects and engineers were specifically excluded as SSTB’s and this may create some planning opportunities for these types of businesses. Other limits or issues may affect the available deduction a will require an analysis of each taxpayer’s individual circumstances.
This new tax law provides us with another tool to assist our clients in saving substantially in income taxes by ensuring that they maximize their available Section 199A deduction.
If you would like more information about this new tax law or information relating to your business planning or tax planning, please contact Bob Cohen at firstname.lastname@example.org or Anthony Lopes at email@example.com. You may also reach them by phone at (610) 458-4400.